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Munro J.H. (2013) Rentes and the European ‘Financial Revolution’. In: Gerard

Caprio (ed.) Handbook of Key Global Financial Markets, Institutions, and Infrastructure, Vol. 1, pp. 235-249. Oxford: Elsevier Inc.

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23

Rentes and the European ‘Financial Revolution’J.H. Munro

University of Toronto, Toronto, ON, Canada

O U T L I N E

Chief Features of the Modern Financial Revolution 235

The Geographic Origins of the ‘FinancialRevolution’: Public Finances in the Low Countriesand France 236

The Historical Origins of the Rente Contracts: InPrivate Agricultural Finance 236

The Usury Doctrine and the Revival of the Anti-Usury Campaign 237

The Relationship Between Franco-Flemish UrbanRentes and the Anti-Usury Campaign in theThirteenth Century 238

The Ecclesiastical Debate About the Usurious orLicit Nature of Rentes 239

Payments to Rentiers in Later-Medieval FlemishTowns 239

The Development of a Permanent Funded NationalDebt in Early-Modern France 240

The Development of Permanent Funded NationalDebts in Spain (Castile) 240

The Public Finances of the Later Medieval ItalianCity States: Forced Loans 241

Protestant England and the Usury Question 242

The Beginnings of the English Financial Revolution,from 1693 243

Excise Taxes in Funding the English National Debt 243

The Three Sisters and the English National Debt 244

The Role of Annuities in the English National Debt(to 1719–20) 244

The Aftermath of the South Sea Bubble and Pelham’sConversion: 1721–57 244

Economic Contributions of the FinancialRevolution 245

Glossary 245

Appendix Yields on Perpetual Rents, Life Rents, andLoans 245

References 247

ucture

Financ

235

ial Markets, Institutio

ns, a

CHIEF FEATURES OF THE MODERNFINANCIAL REVOLUTION

The modern Financial Revolution saw the establish-ment of a national public permanent funded debt com-posed of negotiable perpetual annuities or rentes (thecontinental European term). The public debt was nationalin that it was the responsibility of the national state, usu-ally represented by a legislative assembly – such as Eng-land’s Parliament – rather than the personal responsibilityof a prince or monarch. This public debt was funded inthat the government or national legislative assembly

levied specific taxes, chiefly taxes on consumption, to fi-nance the state’s annual payments on the public debt. Thisnational debt was permanent in that it did not consist ofloans or bonds with specific maturity dates, so that thestate, while always retaining the right to redeem this debt(in part or in whole), had no obligation to do so, for theright of redemption was its sole prerogative – with nosuch rights for the debt holders. Therefore, those whobought or held such annuities or rentes had only one op-tion to regain their capital, inwhole or in part: to sell themto third parties. Exercising that option in turn dependedon the legal establishment of full-fledged negotiability.

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236 23. RENTES AND THE EUROPEAN ‘FINANCIAL REVOLUTION’


This meant legal protection for third-party creditors(assignees), the unencumbered freedom to sell annuitiesanywhere (in the western world), and finally, the devel-opment of efficient secondary markets in negotiable secu-rities, beginningwith theAntwerpBeurs or Bourse (1531),followed by the Amsterdam Beurs (1608), and subse-quently, the coffee houses in Exchange Alley in London(1694: the precursor of the London Stock Exchange,1801) and other international exchanges. Finally, the gov-ernment’s issue and sale of these negotiable securitiesalways took place without any elements of coercion,including arbitrary conversions of short-term floatingdebts into these perpetual securities. This is an importantdistinction from other similar forms of public debts inlater medieval and early-modern Europe.

We owe the term Financial Revolution to Dickson’s(1967) magisterial monograph on English public fi-nances from the late seventeenth to the mid-eighteenthcentury. Contrary to the assumptions of so many histo-rians influenced by this book, Englandwas not the birth-place of this financial revolution.

THE GEOGRAPHIC ORIGINS OF THE‘FINANCIAL REVOLUTION’: PUBLICFINANCES IN THE LOW COUNTRIES

AND FRANCE

According to Tracy (1985, 1994), that honor belongs tothe sixteenth-century Habsburg Netherlands. His thesisis all the more attractive in that the seventeenth-centuryRepublic of the United Provinces (Dutch Republic)clearly inherited a modified form of this Habsburg sys-tem and then, according to many historians, transmittedthis financial revolution to England, shortly afterEngland’s Glorious Revolution of 1688. The new KingWilliam III (r 1689–1702), replacing the deposed JamesII (r 1685–88), was married to, and coruler with, James’daughter and legal successor, Queen Mary (r 1689–94).William was also, as the Dutch Prince of Orange(Willem III), the stadhouder or ruler of five of the sevenDutch provinces. In Dickson’s view, shared by manyother historians, the political principles established bythe Glorious Revolution were essential for the subse-quent Financial Revolution, and many such historiansbelieve that William’s financial advisors (many of themDutch) were deeply influenced by the current Dutchfinancial model.

There are, however, several problems in attributingthe origins of the Financial Revolution to the sixteenth-century Habsburg Netherlands. In the first place, whilethe sale of renten did involve public state finance, therenten or rentes were the responsibility not of theNetherlands’ Staten Generaal (Etats Generaux) but ofthe various provincial Estates. Second, rentes had not

I. GLOBALIZATION OF FINAN

Handbook of Key Global Financial Markets, Institutio

yet become the predominant form of public finance (cer-tainly not to the extent of England’s Financial Revolu-tion). Third, the rentes were, as in centuries past, soldin two forms: life rents (lijfrenten), extinguishable onthe death of the holder (or of his/her assignee), and per-petual rents (erfelijkrenten). Only the latter were clearlytransferable and negotiable, and the peculiar status ofthe latter is indicated by themore common early-modernDutch term: losrenten. Tracy’s admirable study nevermakes clear the extent to which rentes were negotiableand sold on secondary markets. Fourth, both in thesixteenth-century Habsburg Netherlands and subse-quently, in the seventeenth-century Dutch Republic, asubstantial proportion of the public debt was in the formof life rents. Fifth, some purchases of rentes were oblig-atory, not voluntary, especially during war-time emer-gencies, although this was a burden imposed chieflyon the wealthy mercantile classes.

A better, if not entirely satisfactory, case for thenational origins of the Financial Revolution can be madefor both France and Habsburg Spain, during the courseof the sixteenth century. For France itself, for theBurgundian and then Habsburg Low Countries, and in-deed for all medieval Europe, the origins of this peculiarform of public finance can be traced back to the urbanfinances of France’s northern counties of Artois andFlanders, from the 1220s.

THE HISTORICAL ORIGINS OF THERENTE CONTRACTS: IN PRIVATE

AGRICULTURAL FINANCE

In private finance, however, the rente contract goesback centuries earlier, to Carolingian times, in the eighthcentury. This was a form of a census contract by whichmonasteries acquired bequests of land on the conditionthat the donors would receive an annual usufruct in-come (redditus) from the fruits of that land: in kind,money, or some mix of the two, for the rest of the inves-tor’s life or for the lives of his/her heirs and assignees.That income was, in effect, part of the rental value ofthe bequested land, and that value explains the originof the term rente, which is a more useful term than annu-ity, since it indicates more clearly the fruitful and landedsource of the income.

In Catalonia, southern France, and Italy, similar formsof census or rente contracts became a common private fi-nancial vehicle, certainly by the later twelfth or earlythirteenth century, by which merchants invested in theagricultural enterprises of small, independent peasantfarmers (a form of finance that was basically inapplicableto the communal open-field farming of northern Eu-rope). By that time, most such agricultural-commercialrente contracts were perpetual and assignable. The basic

CE: AN HISTORICAL VIEW

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237THE USURY DOCTRINE AND THE REVIVAL OF THE ANTI-USURY CAMPAIGN


principle of such contracts was that investor who boughtsuch contracts could never reclaim his capital from theissuer, unless of course the issuer–seller defaulted onhis annual rente payments, since the land itself servedas the pledge or collateral for this investment. Otherwise,the investor could reclaim his capital only by selling hisrente contract to some third party while undertaking therisk of some loss in doing so.

THE USURY DOCTRINE AND THEREVIVAL OF THE ANTI-USURY

CAMPAIGN

In resorting to this form of public finance, in retro-spect a revolutionary move that inaugurated the finan-cial revolution, the northern French towns weresimply drawing on a long and well-established form ofprivate finance. Onemay ask what impelled these north-ern French towns to do so and particularly in and fromthe 1220s? The answer lies in a vigorous and indeed vi-cious resuscitation of the Church’s anti-usury campaign,forcing both town governments and investors to seek analternative to interest-bearing loans, for which the rentecontract proved to be the most effective and fully licitsubstitute.

Usury, according to the Church, is the sinful act ofboth paying and receiving interest on a loan (with afew licit exceptions). Many historians still unjustifiablydismiss the economic significance of the medieval usurydoctrine, echoing the famous statement of Kindleberger(1993) that it “belongs less to economic history than tothe history of ideas.” Others mistakenly contend thatthe usury ban applied only to excessive interest charges –the modern definition – or only to consumption loans,while, in fact, it always applied to any and all paymentsabove and beyond the principal advanced in any formof a loan contract (including sales on credit). The usuryban is also not explicitly Christian, let alone Catholicin origin, and may be found, for example, in ancientJudaism,Hinduism, and Islam (as riba¼excess) through-out its entire history to the present day. In the Old Testa-ment, the book of Ezekiel 18.13 states (New InternationalVersion, 2010)

He [who] lends at interest and takes a profit. Will such amanlive?Hewill not. Because he has done all these detestable things,he is to be put to death.

That seemingly extreme view is repeated almost verbatimby Bishop St. Ambrose of Milan (339–97 CE): “if someonetakes usury, he commits violent robbery [rapina], and heshall not live.” That statement is, in turn, included inGratian’s famous codification of the Church’ canon law,known as the Decretum (Concordia discordantium



canonum), compiled between 1130 and 1140, a funda-mental bulwark of the subsequent anti-usury campaign,from the Lateran III Council of 1179.

Over the many centuries, from the early days of theChurch to the Scholastic era of the thirteenth century,the usury doctrine evolved through three forms: frombeing merely a sin against charity to a sin against com-mutative justice to a truly mortal sin against NaturalLaw and thus directly a sin against God Himself. Thetrue core of the doctrine was, however, based on the con-cepts of property rights, theft, and loan contracts as pre-sented in the Roman Law Code of Justinian (r 527–565CE), which was in turn later incorporated into Gratian’sDecretum. In both codes, a loan was defined specificallyas a mutuum – literally: what was thine [yours] becomesmine. Thus, in a loan contract, the ownership of the cap-ital was transferred from the lender to the borrower butonly for the stipulated time period of the contract (i.e.,until maturity). Therefore, during the entire term ofthe loan contract, all the benefits or returns from theuse of that capital belonged entirely to the borrower –and none to the lender. Consequently, for the lender toexact any payment beyond the principal, and in effectto demand any share of any returns on that capital,constituted theft (as in St. Ambrose’s famous dictum).

That provides the fundamental distinction betweenthe Church’s view of illicit returns on capital (as inusury) and of fully licit returns on capital invested inreal-estate and equity-based commercial enterprises.In both these latter investment contracts, the investor re-tains the full ownership of his capital and is, therefore,entitled to a valid return on his capital: whether in theform of rent (real-estate) or profits (as in a commendacontract, a compagnia partnership contract, or a joint-stock company). This analysis makes clear that the usuryprohibition had nothing to do with the so-called con-sumption loans, but to all mutuum loan contracts, with-out distinction.

For many historians, however, the full Scholasticdefinition of the usury prohibitionwas based on the rein-troduction of Aristotle’s condemnation of usury, as ‘themost hated sort of money making,’ on two relatedgrounds: that the natural and hence sole use of moneyis to serve as a medium of exchange and, thus, thatmoney is sterile – and incapable of ‘breeding’ to producemore money (i.e., interest). Hence, usury is unnatural –against the laws of Nature. As the foregoing analysismakes clear, however, there is no such assumption ofthe sterility of money in the Justinian and canon law def-initions of themutuum. Indeed, the contrary assumptionmay be made for all investment loans.

Furthermore, Aristotle’s critical works on this subjectwere not translated into Latin and effectively reintro-duced into Western scholarship until well after therevival of the anti-usury campaign: specifically, the





Nichomachean Ethics in 1246–47 (revised in 1260) andhis Politics (1260s). Yet Aristotle’s treatises had a verypowerful influence on Scholastic philosophers, espe-cially in the tracts of Albertus Magnus (1206–80) andSt. Thomas Aquinas (1225–74), in their firm declarationsthat usury is a sin against Natural Law, against GodHimself, and hence a truly mortal sin.

In convincing the laity that usurywas suchmortal sin,the Scholastic reliance on Aristotle’s views was a farmore effective tool for the continuance of the anti-usurycampaign during the following two centuries than mererecitations of arcane features of the Justinian Code andGratian’s Decretum. Also, more effective was the verycommon but quite irrelevant argument that usury wasthe ‘Theft of Time, which belongs only to God.’ Neverexplained, even by the most renowned scholastics, wasthe question why it was a mortal sin to charge for theuse of money based on time (as interest is always reck-oned), while it was perfectly licit to charge for the useof real estate based on time (rent permonth or year). Thatthe true distinction between these two forms of invest-ment returns was the ownership of capital, accordingto Roman and canon law, proved to be incomprehensiblefor most people (then and now).

The inauguration of the anti-usury campaign tookplace much earlier, as just noted, with the Third LateranCouncil of 1179. Not only did it cite Gratian’s Decretumto endorse all previous sanctions against usury but it alsoproclaimed the severe penalties of excommunicationfrom the Church for all usurers who did not repentand did not restore their ill-gotten gains and thus for-bade Christian burials for any such unrepentant usurers.The next (and Fourth) Lateran Council, of 1215, providedtwo additional features of great importance. First, itlaunched a vicious attack on Jewish money lenders, fortheir supposed ‘treachery’ and ‘cruel oppression’ inextorting ‘oppressive and excessive interest,’ that is, be-yond variously imposed legal limits. The usury banhad always applied and continued to apply only toChristians. Jews (in the virtual absence of Muslims inChristian Europe) were the only non-Christians then en-gaging in money lending, chiefly in legal althoughclosely regulated pawn broking. In addressing a largelyanti-Semitic public, this Lateran Council made the sin ofusury appear all the more heinous by so invidiously as-sociating it with Jews, thus providing a powerful newweapon in the anti-usury campaign. Second, the FourthLateran Council decreed that all Christians were obli-gated to make annual confessions to priests – includingconfessions of usury.

That also proved to be a powerful weapon in the anti-usury campaign as conducted by the two new mendi-cant preaching orders, founded just before and just afterLateran IV: the Franciscans, or the Order of Friars Minor,founded c.1206–10 (by St. Francis of Assisi) and the



Dominicans, or Order of Friars Preacher, founded in1216 (by St. Dominic). In preaching to a largely illiterate,uneducated public, the Dominican and Franciscan friarssupplemented the Lateran Council decrees and papal or-dinances with their own lurid and utterly diabolic exem-pla: utterly horrifying stories about the ghastly fatesawaiting all usurers in the eternal fires of Hell. Theresulting popular verdict that usurers were among thevery worst of all evildoers was one fully endorsed inone of the most famous literary tracts of this era: theDivine Comedy of the Florentine Dante Alighieri(1265–1321), who placed usurers in the lower depths ofHell, as ‘the last class of sinners that are punished inthe burning sands.’ The impact of the preaching orderswent well beyond the general public to convince virtu-ally all secular governments of their duty to enforcethe anti-usury bans, with harsh, pitiless vigor. That com-mand to secular princes and local governments was rein-forced by theDecretales that PopeGregory IX (r 1227–41)issued in 1234. They were firmly instructed to expel allusurers from their jurisdictions, never to readmit them,and to nullify all wills and testaments of unrepentantusurers. Furthermore, any priests who permitted theChristian burial of usurers were themselves to be consid-ered usurers and to be punished accordingly.

THE RELATIONSHIP BETWEEN FRANCO-FLEMISH URBAN RENTES AND THEANTI-USURY CAMPAIGN IN THE

THIRTEENTH CENTURY

Shortly after the founding of the two mendicantpreaching orders and just before Pope Gregory’s Decre-tales were issued, the first resort to rentes is found as asubstitute for interest-bearing loans in financing urbangovernments in northern France, beginningwith Troyes,the major town of the Champagne Fairs, just before 1228,and again in 1232. Those transactions involved the sale ofa series of several life rents (rentes viageres) to financiersfrom Arras, St. Quentin, and Rheims, who evidentlyresold them to citizens in those towns. Subsequently,similar sales of rentes are recorded in the treasurer’saccounts of many neighboring towns, in Artois, Picardy,and Flanders, from the following indicated dates:Rheims (1234), Auxerre (1235), Arras (1241), Douai(ca. 1250), Roye (1260), Calais (1263), Saint-Riquier(1268), Saint-Omer (1271), and Ghent (before 1275).

The connection between the intensification of the anti-usury campaign and this novel form of public urban fi-nance is indicated by an event that Desportes (1979) hasrecorded in his history of late-medieval Rheims. In 1234,local clerics had threatened the Rheims bourgeoisiewith the most dire consequences for their suspectedusuries, subjecting them to a reign of terror – with the



239PAYMENTS TO RENTIERS IN LATER-MEDIEVAL FLEMISH TOWNS


irredeemable loss of their mortal souls. In response, thelocal merchants decided henceforth to buy rentes fromthe town government rather than to engage in anyinterest-bearing loans. In his study of thirteenth-centuryFlanders, Bigwood (1921–22) asserted that “the struggleagainst usury was energetically and remorselessly con-ducted” by the Church, town governments, and thecounts of both Flanders and Artois. Nicholas (1992) ob-served that the later-medieval “Flemings seem to havebeenmore concerned than the Italians to avoid the impu-tation of usury.”

The central issue was not the ability of merchants andfinanciers to find ready means of disguising interest,which no longer appeared in loan contracts (Munro,2003, 2008), but instead, their very real fear of eternaldamnation in Hell, with unbearable, unremitting agony.Usury could well be hidden from secular authorities butnever fromGod – or somost of the very devout Christiansociety then believed. Another powerful if more mun-dane reason to explain a growing mercantile preferencefor buying rentes was the frequency with which secularauthorities sought ecclesiastical permission to repudiatetheir usurious debts, in northern France (Saint-Remi andBeauvais) as early as 1254. During the Flemish fiscal cri-ses of the 1290s, the Flemish communal governments, onseveral occasions, received permission from the Parle-ment de Paris, King Philip IV (r 1285–1314), and evenPope Boniface VIII (r 1294–1303) to repudiate loansdeemed to be usurious, and on other occasions to relievethem of any payments beyond the principal sums owedto them. Even the Flemish count, Guy de Dampierre, inthe 1290s, appealed for papal assistance in releasing himfrom the usurious loans owed to his Arras bankers.

THE ECCLESIASTICAL DEBATE ABOUTTHE USURIOUS OR LICIT NATURE

OF RENTES

A direct link between the thirteenth-century anti-usury campaign and the resort to rentes in urban (andsubsequently in territorial) public finances can be seenin various ecclesiastical diatribes against such rente con-tracts. One of the earliest came from the Italian canonistGottofredo da Trani (Geoffrey of Trani, d. 1245), whocondemned the purchase of rentes as usurious on thegrounds that the buyers were guilty of an ‘immoralhope’ that the value of their annual annuity paymentsover time would exceed their costs in purchasing therentes, and his views were supported (ca. 1250) by theDominican canonist Guillaume de Rennes.

In 1250–51, however, Pope Innocent IV (r 1243–54) op-posed these critics by declaring the new rentes to be fullylicit (as were any real-estate rent contracts) on thegrounds that they were not loans, since they never had



to be repaid, but instead legitimate contracts of sale, inpurchasing a future stream of income. The pope’s decla-ration was not, however, universally accepted, not untilthe fifteenth century, with the canonists’ and theolo-gians’ ultimate affirmation of this fundamental princi-ple: ubi non est mutuum, ibi non est usura (wherethere is no loan, there is no usury). In accordance withthat principle, they insisted that those who bought rentescould never demand their redemption (an act that wouldhave converted them into loans), while affirming that theseller–issuer of rentes had the sole right to effect a re-demption when the issuer deemed it to be desirable ornecessary. The other condition that the papacy and can-onists specified is a most important one for the future ofthis instrument of public finance: that the annual pay-ments had to be based on real properties and the incomederived from such properties. In brief, a rente contractwas to resemble a standard real-estate rent contract.

These two issues – the conditions of redemptionand the nature of the annuity payments – engaged theChurch in ongoing debate for almost two centuries untilthey were finally settled in the fifteenth century. A seriesof opinions issued by the Council of Constance (1414–18)were ratified by three related papal bulls: those ofMartin V (Regimini, 1425), Nicholas V (Sollicitudo pas-toralis, 1452), and finally, Calixtus III (Regimini, 1455).While reaffirming the basic principle enunciated byInnocent IV and specifically reaffirming the sole rightof the issuer–seller to redeem rentes, at their own discre-tion, these decrees, nevertheless, obligated the issuer–sellers to redeem their rentes for the full principal orpar value – but obviously in nominal and not real terms.The other conditions were, in sum, that the rentes had tobe tied to real estate or other real property; that the an-nual payments were to be derived from such property;and that the annual return or annuity payments werenot to exceed 10% of the capital sum. That final conditionwas almost never observed, although without causingany further controversy.

PAYMENTS TO RENTIERS IN LATER-MEDIEVAL FLEMISH TOWNS

The far more vexatious problem was the rental natureof rentes and thus the sources of public income used tomake the annual payments (if not specifically the redemp-tions). As the later-medieval Flemish town accounts re-veal, most of the perpetual rents (erfelijkrenten) weretied to real estate, and the annual payments came fromsuch rental incomes. Very different was the source ofthe annual payments for the life rents (lijfrenten). Theycame instead fromexcise taxes on the consumption of var-ious products of the land – foodstuffs (bread, meat, fish),





alcohol (beer and wine), textiles, and so on – but neverfrom direct taxes.

Such excise duties (accijnzen, in Dutch) constitute oneof the most regressive forms of taxation, far more regres-sive than late-medieval land, wealth, and other forms ofdirect taxation. A recent study, based on the accounts ofthe Flemish town of Aalst (Munro, 2008), virtually com-plete for the period 1395–1550, contends that such taxa-tion often provided a very heavy burden on the urbanartisanal and laboring classes and resulted in significantincome transfers from the poorer to the wealthier (i.e.,rentier) strata of late-medieval Flemish urban societies. In-deed, such tax burdens largely offset the general rise inrealwages during the so-calledGoldenAge of the artisansin the fifteenth century and aggravated the fall in their realwages during the ensuing sixteenth-century PriceRevolu-tion era. For the 155-year period from 1496 to 1550, excisetaxes accounted for 74.5% of Aalst’s total urban revenues(renten sales, for 11.9% – no loans are indicated), whilepayments on renten accounted for 36.5%of total urban ex-penditures during this period. During the war-torn yearsof the fifteenth century (1401–80), they accounted for48.6% of such expenditures (and asmuch as 74.5% duringthe Anglo-Burgundian War of 1436–39).

There is now a substantial volume of literature on thepublic finances of the later medieval and early modernLow Countries (see the section ‘References’), althoughthere is not yet a monograph that covers this entireregion – the modern-day kingdoms of the Netherlandsand Belgium – from the thirteenth to eighteenth century.Most of these individual studies indicate, if not fullydemonstrate, how this rente-based system of urban pub-lic finance was adopted by various provincial govern-ments of this region during these centuries, with themost complete development in the seventeenth-centuryRepublic of the United Provinces (the Dutch Republic).

THE DEVELOPMENT OF A PERMANENTFUNDED NATIONAL DEBT IN EARLY-

MODERN FRANCE

In the neighboring kingdom of France, according toboth Cawes (1896) and Hamilton (1947), King Francis I(r 1515–47) was the first European monarch to establisha permanent funded national debt, in 1522. This conten-tion may be disputed, however, on several grounds.First, although the king received the proceeds from thesale of rentes worth £200000 livres tournois to a consor-tium of Parisian merchants, that transaction was under-taken by the Hotel de Ville of Paris, which wasresponsible for the annual payments, derived from itsown administration of specified royal excise taxes andgabelles. Evidently, French merchants then had a fargreater trust in the municipal government, to honor



the fiscal obligations, than in the royal government. Sec-ond, the issuer’s right to redeem such rentes did not re-ceive royal approval until 1539, and even then it waslimited to rentes secured on real estate, and only for30 years (though extended to 60 years, in 1548). Third,although these rentes were assignable to third parties,no secondary markets were then available, and the ren-tes were not negotiable in anymodern sense (seeMunro,2003, 2012).

A far greater expansion of national rente sales tookplace under Francis’ successor, Henry II (r 1547–59),and through the crown itself: a total of £6.8 million livrestournois. But of this amount, £3.1 million in rente saleswere forced on wealthy Parisian merchants (in defianceof Parlement) along with other forced loans. Further-more, in 1557 and 1559, Henry IV’s royal governmentdefaulted on restructured short-term debts (consoli-dated in the Grand Parti de Lyon). This odious policyof forced loans and other requisitions (especially fromthe clergy), forced sales of rentes to the wealthy bour-geoisie, and periodic defaults on both short-term loansand annuity payments continued under his successor,Charles IX (r 1560–74), who presided over the initialphase of the ruinous Wars of Religion (1562–98).

In 1600, Maximilien de Bethune (1560–1641), Duke ofSully, the justly famed Superintendent of Finances forthe victor, Henry IV (r 1589–1610), effected a muchneeded financial reform. At that time, rentes accountedfor about £157 million livres tournois, over half of the to-tal French royal indebtedness of £297 million, and muchof that was in arrears. Sully canceledmany rentes lackinga verifiable claim, ceased payments on many arrears,redeemed some rentes with budget surpluses, and forcedmany other rentiers and debt holders of theGrand Parti toaccept major reductions in their claims. He also reducedthe annuity payments on rentes from the traditional rateof 8.33% (1/12) to 6.25% (1/16), and in 1634, this rate wasfurther reduced to 5.55% (1/18). Those rates were far, farlower than the interest rates that current and succeedingFrench monarchs had to pay on regular loans (whichaveraged 25.88%, from 1631 to 1657). Finally, in 1789,on the eve of the French Revolution, the total public debtwas about £3.5 billion livres tournois: about £1.0 billion inshort-term (interest-bearing) floating debt, £2.0 billionin rentes, and £0.5 billion in capital invested in royal of-fices (Hoffman et al., 2000).

THE DEVELOPMENT OF PERMANENTFUNDED NATIONAL DEBTS

IN SPAIN (CASTILE)

A far better case, for the initial successful establish-ment of a permanent funded national debt, based on ren-tes, may be made for sixteenth-century Habsburg Spain,



241THE PUBLIC FINANCES OF THE LATER MEDIEVAL ITALIAN CITY STATES: FORCED LOANS


which had inherited this form of public debt from late-medieval Catalonia (Aragon) and Castile. In 1325, theCatalan towns, as part of the Crown of Aragon, receivedthe king’s permission to raise public funds, either by bor-rowing or by selling censals, the Catalan version of ren-tes, in return for their consent to new royal aides (taxes).During a financial crisis of the 1330s, Barcelona soldcensals in two forms: the censal mort, as a perpetual,hereditary annuity, with an annual payment of 7.14%(1/14), and the violari (censal vitalicio), as a life annuitybut commonly for two lives, with an annual paymentof 14.29% (1/7). Other Catalan towns followed suit inthe 1350s: Alzira (1351), Valencia (1355), Gandıa (from1359), and Gero (from 1359). By the 1360s, such salesof censals, funded by levies of various urban excise (con-sumption) taxes, had become a fundamental feature ofCatalan and Aragonese municipal finances. With a fewexceptions – in 1359 and 1376 (Perpignan), the censalswere freely marketed without any compulsory pur-chases, and these towns also had the right to redeemthem at will. They could also be sold to third parties –however, in a cumbersome fashion – again requiringcivic officials and notaries public as agents for suchtransactions, similar to provisions for real estate sales.By the fifteenth century, sales of censals had largely dis-placed floating debts of short-term loans. In neighboringCastile, issues of similar censals were first authorized inthe reign of Henry II (1368–79) and according to Usher(1943), had become a common feature of public financeby the fifteenth century.

The history of modern Spain’s permanent fundeddebt began in 1489 when Ferdinand and Isabella sold aseries of hereditary, perpetual, and redeemable rentes,known as juros de heredad, to finance their war withGranada, which led to the federal union of Castile,Aragon, and Navarre in 1492 (but without a federalnational assembly). These juros (sometimes supplemen-ted with life rentes) initially paid 10%, while subsequentjuros yielded on an average 7%, and they were funded, inCastile, by levies of royal excise taxes (rentas ordinaris).From the first continuous records, in 1504, to the end ofFerdinand’s reign, in 1516, the Spanish (or Castilian)funded national debt rose modestly, from 2.996 millionducats (escudos of 375 maravedıs) to 3.586 millionducats. But then, from the accession of the HabsburgCharles V (Emperor from 1519) to the death of his sonand successor Philip II (r 1556–98), the Castilian nationaldebt ballooned to 80.040 million ducats.

Not only Spaniards but also an increasing number ofinvestors across Europe purchased these juros, whichwere readily transferable by sales contracts. Indeed, aninternational commerce inHabsburg juros and rentes be-came one of the principal activities of the South Germanmerchant-banking houses, led by the Fuggers, Welsers,Hochstetters, Herwarts, Imhofs, and Tuchers. Evidently,



they were marketed through the newly established Ant-werp Beurs (although conclusive evidence for suchtransactions is not available). Furthermore, from 1537to 1541, the Staten Generaal of the Habsburg Nether-lands provided Europe’s first national legislation to pro-tect and enforce full-fledged negotiability of commercialbills and other financial obligations, in particular toprotect the property rights of third-party creditors(assignees) (Van der Wee, 1963, 1967).

According to many critics, Habsburg Spain’s claim tofame in establishing a national (Castilian) funded publicdebt based on negotiable perpetual annuities wasmarred by Philip II’s failure to honor interest obligationson short-term loans called asientos, whose interest ratesranged from 14% to 20%. Instead, he imposed an arbi-trary conversion of most of the asientos into 5% perpet-ual juros al quittar on four occasions, in 1557, 1560, 1575,and 1596, in effect making them obligatory obligations,although they remained fully negotiable securities. Re-cently, furthermore, Drelichman and Voth (2010) haveconfirmed that Philip II never defaulted on any pay-ments for these juros (both life and perpetual). Eventhough servicing the public debt was often a very heavyfiscal burden, consuming 49% of total Castilian revenuesin Philip’s final decade, these authors contend thatPhilip’s finances were ‘largely sustainable’ and that‘Castile’s fiscal position was much healthier than is com-monly assumed.’ That is all the more remarkable whenfull account is taken of the enormous military burdensimposed on this ‘superpower of the age’ and HabsburgSpain’s resolute refusal to debase its coinages.

THE PUBLIC FINANCES OF THE LATERMEDIEVAL ITALIAN CITY STATES:

FORCED LOANS

In view of Aragon’s long involvement in Italian af-fairs, from the later thirteenth century, one may wonderif the Italian city states had had any influence on the evo-lution of public finances in Aragon and then Castile.There is no evidence of any such influence nor are the or-igins of the European financial revolution to be found inany of the medieval Italian city states (Stasavage, 2011).

To be sure, the Italian city states were the first inEurope to establish funded public debts, with arrange-ments to pay interest on loans from specified commercialtaxes: first Genoa in 1149 and then Venice in 1164. But theItalian city states are not the fount of the Financial Rev-olution for several reasons. The most important is thattheir public finances came to be largely based on forcedloans, of which the first was imposed by the VenetianDoge Sebastiano Ziano, as early as 1172. In Venice, theywere known as prestiti; in Florence, as prestanze; andin Genoa, as luoghi. While most of these forced loans





initially had specific redemption dates, they soonevolved into undated perpetual loans, which were con-solidated together into one public fund, with annual in-terest payments financed by specific commercial andexcise taxes, under various names, for example, MonteVecchio (Venice: from 1264), Monte Comune (Florence:1345), and Compera (Genoa: 1340). Furthermore, allthese city–state consolidated funds came to be linkedto civic-organized secondary markets in which debtholders could sell their claims to third parties, and theseItalian city states may have been the first in Europe to or-ganize such secondary if still imperfect markets in publicdebts. In that respect, these Italian public debts seem, butdeceptively so, to resemble the rentes and censals to befound in the towns of northern France, the Low Coun-tries, and Catalonia in the fourteenth century.

The second major difference between the Italian andthe non-Italian forms of urban public finance involvedagain the usury prohibition. The Church – the Franciscanand Dominican theologians in particular – grudginglyagreed that interest payments on these forced loansdid not constitute the sin of usury, at least on the partof thosewho received the interest, chiefly on the groundsthat volition, central to the usury doctrine, was necessar-ily absent. Furthermore, the obvious civic alternativewas taxation, which the Church would never have chal-lenged, all the more so since the clear objective of theseforced loans (or of any tax alternatives) was to financethe public defense of the commune.

When a secondary market developed in these variouscivic monte funds, however, the usury issue did come tothe forefront, with unrelenting attacks from especiallythe Dominicans, who contended that those who boughtshares of the public debt were willingly accepting inter-est payments that were clearly usurious. One of the mostimportant and famous medieval treatises in public fi-nance, one that arose from this dispute, was the Tracta-tus de usuris, which the Florentine jurist and statesmanLorenzo di Ridolfo published in 1403–04. He contendedthat commerce in monte shares through the civic-organized market did not involve usury but only a licitpurchase of income streams from the town government,since those who purchased these shares had never lentanymoney to the government. That argument is reminis-cent of the thirteenth-century debates over the rentes.But while virtually all theologians had come to agree thatrentes were not usurious, most still remained hostile to afree market in shares of the civic monte. That hostility isreflected in considerable evidence for a fairly wide-spread reluctance to engage in such financial transac-tions, including some wills dictating restitutions ofincomes earned frommonte shares purchased in second-ary market (see Armstrong, 2003a,b; Kirshner, 1977).A thirdmajor difference – a difference from a developinginternational market in various rentes – is that normally



the trade in monte shares was restricted to citizens of thecity state that had undertaken the forced loans and is-sued these shares. The reason for this restriction wasto emphasize the principle that the forced-loan obliga-tion was justified by the civic duty to finance the com-mune’s defense, a duty obviously not borne byforeigners. Again this explains why theologians had ac-cepted the legitimacy of interest payments on thoseloans, but only payments to those who had originallyand unwillingly furnished the funds. Consequently,the various civic monte shares could not be traded on in-ternational markets and transfers to third parties couldbe effected only through the designated civic offices ofeach town’s monte. Kirshner (1977, 1983, 1993), one ofthe leading authorities on the Florentine monte, hasprovided many cogent reasons why trade in the Italianmonte shares did not meet the modern tests fornegotiability.

For all these reasons, the Italian city states eschewed afinancial systembased on genuine rentes, and onlyVeniceexperimentedwith them, briefly, the sixteenth century. In1536, Venice issued a form of life annuities paying 14%,but they were sold by the mint (Zecca), not by the civicgovernment. Subsequently, in 1571, during the Venetianwar with the Turks, the Venetian government issued per-petual but redeemable annuities at 8%. Yet the Venetiangovernment did not continue with this new mode ofpublic finance, and from 1577 to 1600, it redeemed allthe outstanding annuities that the Zecca had issued inits own name, at a cost of over 10 million ducats.

PROTESTANT ENGLAND AND THEUSURY QUESTION

In returning to investigate England’s own FinancialRevolution, one finds that it did come tomeet all the fun-damental tests, those enunciated in the introduction,more fully and more satisfactorily than did any otherearly modern European government.

First, however, onemust ask whether or not the usuryprohibition has any relevance for the English FinancialRevolution. It is a commonplace in the financial litera-ture that the Protestant Reformations had accepted thelegitimacy of interest payments and thusmade the usuryproblem irrelevant. That view, or at least the latter part,is mistaken. To be sure, in 1545, Henry VIII’s Parliamentof newly Protestant England did enact legislation to per-mit interest payments up to a limit of 10% (statute 37Henrici VIII, c. 9). In doing so, Henry VIII’s governmenthad followed the model of an edict issued five years ear-lier, in October 1540, by Charles V and the Staten Gener-aal of the still Catholic Habsburg Netherlands, althoughit had made interest payments fully licit up to a limit of12% (but only for commercial loans). In both sets of



243EXCISE TAXES IN FUNDING THE ENGLISH NATIONAL DEBT


legislation, usury (woekerie, in Flemish) thus came tobe defined (as now) as interest charges above the legallimit.

In England, however, Henry VIII’s legislation did notlong survive his reign. In 1552, under his successorEdward VI (r 1547–53), the far more ardently Protestantgovernment of John Dudley, Duke of Northumberland(r 1551–53) had Parliament repeal Henry’s statute (5–6Edwardi VI, c. 20): ‘Forasmuche as Usurie is by theworde of God utterly prohibited, as a vycemoste odyousand detestable.’ Not until 1571 did Henry’s daughterElizabeth I (r 1558–1603) dare to restore her father’s stat-ute (13 Elizabeth I, c. 8). Even so, the new statute reiter-ated standard historical prejudice in declaring thatall interest charges above 10% ‘shalbe utterlye voyde –forasmuch as all Usurie being forbydden by the laweof God.’ (see Munro 2012).

Of the two leading Protestant Reformers, MartinLuther (1483–1546) and John Calvin (1509–64), onlythe latter accepted interest payments, but grudginglyunder certain conditions: only on investment loansand certainly not on charitable loans to the poor. In-deed, Calvin stated that “it is a very rare thing for aman to be honest and at the same time a usurer.” Sub-sequently, in seventeenth-century England, a Puritandivine commented that “Calvin deals with usurie asthe apothecarie doth with poison.” (Tawney, 1926).Thus, Protestant reformers in not only the sixteenthcentury but also throughout much of the next century,through the Civil War and Protectorate era (1642–60),were generally more hostile to usury than were Catho-lics, even though usury remained banned in Catholiccountries until the French Revolution. As Tawney(1926) has noted, Protestant preachers of this era wereunceasing in their condemnation of the ‘soul-corrupting taint of usury.’ Stone (1965) has been themost eloquent in commenting on the negative conse-quences of the usury doctrine as it persisted in early-modern Protestant England:

Money will never become freely or cheaply available in a so-ciety which nourishes a strong moral prejudice against the tak-ing of any interest at all – as distinct from objection to the takingof extortionate interest. If usury on any terms, however reason-able, is thought to be a discreditable business, men will tend toshun it, and the few who practise it will demand a high returnfor being generally regarded as moral lepers.

Indeed, English/British Parliaments in early modernEngland, even after the Glorious Revolution, continuedto express their hostility to usury by statutes that pro-gressively lowered the legal maximum interest rates:in 1623, from 10% to 8%; in 1660, to 6%; and finally, in1713, to 5%. Not until 1854 (17–18 Victoria c. 90) didParliament finally abolish the usury laws.



THE BEGINNINGS OF THE ENGLISHFINANCIAL REVOLUTION, FROM 1693

When one realizes that in 1693, shortly after the Glo-rious Revolution, the crown was forced to borrow at14% to finance William III’s wars with France’s LouisXIV (r 1643–1715), one can better appreciate the signif-icance of annuities, which, of course, were always fullyexempt from the usury laws. According to PeterDickson, one may mark the beginning of the EnglishFinancial Revolution with the so-called Million PoundLoan of 1693 – which was not a loan but a life annuity(with a curious tontine feature added to it). The secondstep, the following year (1694), was the formation of theBank of England, with a monopoly on both joint-stockand government banking, in return for a perpetual loan,with an annual interest payment of 8%. Parliament re-duced that rate to 6% in 1709 and then to 3% in 1742(plus an annual management fee of £4000). In betweenand after those dates, to the eve of the consolidation ofthe national debt (see below), the Bank of Englandmade other major loans to the crown, for a total of£11686800: £8486800 at 4.0% and £320000 at 3.0%(accounting for 16.59% of the national debt: Dickson,1967, Table 26).

EXCISE TAXES IN FUNDING THEENGLISH NATIONAL DEBT

In establishing the Bank of England in 1694, as a char-tered incorporated joint-stock company, Parliament hadvoted to levy a special tax, on ship tunnage, to pay theBank its annual interest. Subsequently, Parliamentfunded all the subsequent components of what becamethe permanent national debt with similar taxes, chieflyexcise taxes on consumption.

England, in comparison, with most of the westerncontinental countries, had been quite tardy in adoptingexcise taxes on consumption, chiefly because it had pre-viously received ample revenues from customs dutieson both exports (wool, cloth) and imports, especiallythose on wine. This continental form of taxation wasnot introduced until 1643, in the Long Parliament underthe leadership of John Pym, in order to finance the firstphase (1642–46) of its armed conflict with Charles I(r 1625–49) in the English Civil War. From 1660, withthe Restoration of the Monarchy, and also with theonset of the era of the so-called New Colonialism, theEnglish government began receiving growing revenuesfrom import duties on such colonial products astobacco, tea, sugar, rum, Indian cottons, timber, andiron, in addition to those on wines. The combinationof excise taxes and the new customs duties soon became





the principal mechanism for financing the government,especially from the 1690s, and in particular the nationaldebt. By the late eighteenth century, the sum of exciseand import-customs duties accounted for 78.8% oftheMajor Taxes (accounting for over 90% of total taxes),while the land tax and the few other forms of directtaxation (excluding an income tax, not levied until thetemporary tax of 1799–1816) accounted for the rem-aining 21.2% (O’Brien, 1988; O’Brien and Hunt, 1993,1997).

THE THREE SISTERS AND THE ENGLISHNATIONAL DEBT

For the remaining history of the English FinancialRevolution, only the salient features need be mentionedhere, of which the role of the famed Three Sisters is themost important. The first was the Bank of England itself,and the second was the East India Company. In 1698,Parliament had chartered a rival, the New East IndiaCompany, in return for a perpetual loan of £2.0 million,also at 8.0%, and in 1709, Parliament permitted the oldercompany to absorb its rival, as the United East IndiaCompany, for another perpetual loan of £1.2 million (in-terest rate not specified).

Two years later, in 1711, Parliament chartered and in-corporated a new overseas trading company: the SouthSea Company, which became the third Sister. Ostensiblyfounded to control English trade in the Spanish-dominated South Pacific, its real purpose was to takeover, by stages, the share of the national funded debtnot controlled by the other two Sisters. In that year,the South Sea Company successfully negotiated a con-version of £9471324 in various issues of short-termredeemable (callable) debts into the Company’s perpet-ual stock with a 5.0% dividend (Dickson, 1967, Table 7).Although the debt holders surrendered securities withhigher interest rates, they gained two enormous advan-tages: a far longer investment time horizon, if not perpet-ual, and the ability to trade these fully negotiable shares(the debts so exchanged were not readily negotiable),with good prospects of capital gains, with brokers orstockjobbers in London’s Exchange Alley or withbroker–dealers in Amsterdam. By 1719, the Company’sholdings of government debt had risen to £11746844(23.54% of the total). The Company proposed, with asimilar voluntary conversion scheme, to take over theremainder of the national debt not held by the threesisters: in sum, a total of £16546202 in redeemable gov-ernment stock and £15034686 in both long-term andshort-term annuities, for a total of £31580888 or64.28% of the total debt (£49902760: Dickson, 1967,Table 9).



THE ROLE OF ANNUITIES IN THEENGLISH NATIONAL DEBT (TO 1719–20)

The role of annuities in the evolution of the nationaldebt, to the 1719–20 South Sea venture, provides interest-ing contrasts with contemporary continental publicdebts. As noted, the 1693 Million Pound Loan was actu-ally a life annuity (at 14%). In 1694, during the formationof the Bank of England, the Exchequer (Ministry of Fi-nance) sold a small series of annuities with various du-rations: for three lives (14.0%), two lives (12.0%), and onelife (10.00%). In 1704, the Exchequer sold another seriesof annuities, paying 6.60% per year: one series for99 years and the other for one, two, and three lives.Thereafter, from 1705 to 1709, the Exchequer sold an-other five series of 99-year redeemable or convertible an-nuities, with rates that fell from 6.60% (1705) to 6.25%(1708). In 1710, it began issuing a combination of 32-yearannuities and redeemable lottery loans, at 9.00%. By1719, the long-term annuities had been increased andconverted into 5.00% annuities, totaling £13331320,and the short-terms annuities had been expanded andconverted into a total of £1703366, with an average rateof 7.143%.

THE AFTERMATH OF THE SOUTHSEA BUBBLE AND PELHAM’S

CONVERSION: 1721–57

The subsequent history of this venture and the famedSouth Sea Bubble – which reduced the South Sea Com-pany’s status to that of a holding company – are notthe subject of this study. In effect, the Bank of Englandeffectively took control of the national debt, with a smallrole played by the Exchequer. After 1721, all further is-sues of government debt took the form of perpetualbut redeemable government stock or redeemable non-term debentures (both of which series also had lotteryfeatures), with coupons that varied from 5.0% (1721only) to 4.0%, 3.5%, and 3.0% (but not in any chronolog-ical sequence).

The culmination of England’s Financial Revolutioncame with the conversion and consolidation of the na-tional debt from 1749 to 1752, with a stipulated finalchange in 1757. On the eve of that conversion, the ThreeSisters collectively and directly held £19549584 of thegovernment debt (27.75%). Two of them, the Bank ofEngland and the South Sea Company, managed a totalof another £49241891 of the debt in the form of perpetualstock (69.90% of the total debt). The Bank of Englandhad the largest single share: £25602472 (36.35% of the to-tal debt). The remaining £23639419 (33.56% of the totaldebt) was in the form of South Sea Old Annuities and



245APPENDIX YIELDS ON PERPETUAL RENTS, LIFE RENTS, AND LOANS


South New Annuities. In total, the Three Sisters thusheld or managed virtually all the national debt –97.65% – leaving only £1649821 or 2.34% to be managedby the Exchequer, for a total national debt of £70441296(Dickson, 1967, Table 26). Of this total national debt,81.92% (£57703475) was a combination of direct debtand perpetual but redeemable securities with a couponof 4.0%; the remainder was largely in the form of 3.0%securities, with only £400000 in 3.50% securities, man-aged by the Exchequer.

The great achievement of the Chancellor the Exche-quer, Sir Henry Pelham, was to achieve a massiveconversion of that 4.0% debt, by 1752, into the Consoli-dated Stock of the Nation, with a 3.5% coupon. By theprovisions of Pelham’s Conversion, that coupon wasreduced to 3.0% at Christmas 1757. Despite strenuousopposition from South Sea Company shareholders, thatconversion was voluntary, in the light of the govern-ment’s historic power to redeem perpetual annuities.As indicated earlier, in the fifteenth-century ecclesiasti-cal debates, redemptions had to be effected at par value:in the case of Consols, £100 per share.

In fact, the British government did not choose to re-deem its Consols for over 130 years, not until 1888, whenongoing and severe deflation had raised real interest ratesand thus the market value of the 3.0% Consols. In thatyear, the Chancellor of the Exchequer, George Goschen,converted the entire issue of 3.0% Consols into new2.75% Consols, with the statutory provision that this ratewould be further reduced to 2.50% in 1903. Those 2.50%Consols, unredeemed, continue to trade to this veryday, on the London Stock Exchange (with amarket value,on 1 June 2012, of £70.99 per share, for a yield of 3.52%).

ECONOMIC CONTRIBUTIONS OF THEFINANCIAL REVOLUTION

For England itself, this Financial Revolution provideda remarkably effective and stable form of public finance.It certainly contributed to a significant reduction in thecost of government borrowing and thus in the so-calledcrowding-out effect, for the private sector: from 14.0% in1693 to 3.0% in 1757. Certainly, from their very inception,rentes or annuities in European public finances were farless costly to finance than interest bearing and thus usu-rious loans. Furthermore, perpetual, heritable renteswere always cheaper than life rents. Perpetual annuities,contrary to the term itself, did not pose a perpetual bur-den on the state because the state always enjoyed the re-serve power of redemption, when it deemed best toexercise it (as in 1888).

Second, a clear majority of the investing public foundgovernment rentes or annuities tobeaveryattractive formof investment, despite such seemingly low yields (in fact,



an acceptable market trade-off), because they were soreadily negotiable, marketed on the London and manyother international stock exchanges, while most bondswere difficult to trade (before the twentieth century),and most loans, even when assignable, were not readilynegotiable. Indeed, for that very reason,Consols andothernegotiable annuities provided European investors with amost valuable formof collateral for short-termborrowing,especially for merchants and industrialists during the In-dustrial Revolution and the subsequent nineteenth-century era of industrialization in Britain and the conti-nent (if not in the United States, which had never resortedto such annuities for public finance).

Two questions remain to be answered, although nothere. First, in terms of a global perspective on interna-tional finance, why did the Islamic world, equally sub-jected to the constraints of the usury doctrine (riba),fail to resort to rentes or some similar alternative in pub-lic finance, before the Ottoman imperial governmentfinally adopted them in the eighteenth century? Second,why did European governments return to interest-bearing bonds and largely eschew annuities (or perpet-ual bonds), after World War I?

SEE ALSO

Globalization of Finance: An Historical View: The Fi-nancial Revolution in England; John Law and his Exper-iment with France, 1715–1726.

Glossary

Accijnzen Dutch term for excise taxes on consumption goods.Asientos Spanish short-term bonds, based on specific tax sources.Censals Catalan version of rentes, either censal mort (perpetual) or

censal vitalico (life).Erfelijkrenten Perpetual rentes, redeemable only by seller; buyer’s

only recourse was to sell in secondary market.Gabelles French salt taxes collected regionally.Juros de heredad Spanish perpetual, redeemable rentes.Lijfrenten Life rentes, expiring on death of the buyer.Livres tournois French unit of account, expressed with same pound

sign as English system.Mutuum Transfer of capital from lender to borrower (what is mine is

now yours).Rentes heritables French term for perpetual, inheritable rentes.Rentes viageres French term for life rentes.

APPENDIX YIELDS ON PERPETUALRENTS, LIFE RENTS, AND LOANS

Whether the predominant form of rentes issued bylate-medieval town governments was in the form of life





rents (rentes viageres, lijfrenten) or perpetual rents (ren-tes heritables, erfelijkrenten, losrenten) had some consid-erable significance for urban and also territorial publicfinances, primarily because the annual payment ratesor the rate of return was so much higher on the formerthan on the latter. If not initially, the rates of return onlijfrenten normally came to be double those for erfelijk-renten, even though the historic long-term trend wasfalling for both. Thus, in late thirteenth-century Flemishtowns, the annual payment rates or coupons on erfelijk-renten were typically 1/10 or 10%. While they were 1/8or 12.5% in late fourteenth-century Ghent, these couponrates fell to 6.25% (1/16) in the fifteenth and sixteenthcenturies, in most towns of the Habsburg Netherlands.The late thirteenth-century annual payment rate on lij-frenten was typically 12.5% (1/8), subsequently declin-ing to 10% (1/10) and sometimes even to as low as8.0% (1/12.5). In fifteenth-century Zutphen, in the north-ern Netherlands, the rates on lijfrenten were 10.0%(1/10), and those on erfelijk or losrenten (as perpetualrents were now more commonly known) generallyhad an annual payment rate of 6.25% (1/16). In earlysixteenth-century Leiden, while the payment rates onperpetual annuities (losrenten) remained low at 6.25%(1/16), those on lijfrenten for two lives were 10.0%,and those for one life were as high as formerly, at12.5% (1/8), and thus double the rate for losrenten. Inthe fourteenth-century Catalan towns, the payment rateon life rents (censal vitalicio, or violari) was again exactlydouble the rate paid on perpetual rents (censal mort):1/7 (14.29%) compared to 1/14 (7.14%).

The explanation for these differences is twofold.While today the yield on long-term bonds is generallymuch higher than yields on short-term bonds – withthe lowest rates for 30-day Treasury bills, the oppositewas often true in late-medieval and early-modern Eu-rope, at least for rentes and annuities. In general, inves-tors preferred the greater financial security from longerterm debt instruments, that is, the prospect of receiving asteady interest or annuity income for a longer period oftime. Therefore, they accepted the trade-off of lowerannual rates for that longer term investment horizon,provided, of course, that there was no observable differ-ence in the risk of nonpayment on the two types (includ-ing the risk of redemption).

The other and undoubtedly more important reasonexplaining the differences in the payment rates on thesetwo types of rentes lay in the issue of negotiability ofthese credit instruments. Perpetual rents, being both in-heritable and transferable, were much more marketablethan lijfrenten, so that purchasers were much more will-ing to accept a lower rate of return, to gain that advan-tage. Furthermore, those holding lijfrenten ran the riskof dying with a nonheritable assets unless the lijfrentwas sold for two lives, and with special features of



assignability to the spouse or heirs. Hence, those holdingstandard lijfrenten demanded compensation for that riskof loss. As noted above (for Leiden), the payment rateson standard one-life lijfrenten were higher than thosesold for two lives.

Obviously urban, territorial, and national state gov-ernment benefited from selling perpetual rents at muchlower payment or coupon rates than those assigned tolife rents. Whenmarket interest rates rose, they benefitedeven more in not having to pay the higher rates thatwould have been necessary for new annuity issues.If market interest rates fell, such governments had thereserve power to redeem the perpetual annuities atpar – and clearly such annuity payments were neverperpetual. Thus, the seeming advantage of life rents, inthat they were self-extinguishing on the death of theholder, was not an important one.

Any doubts about which form of rente was the morebeneficial for urban or territorial governments were laidto rest, in 1671, when Johann deWitt, the Grand Pension-ary of the Republic of the United Provinces, employingan early form of probability theory, mathematicallydemonstrated that the sale of lijfrenten was very costlyfor the government, if the age of the designated nomineewas not taken into account, especially if the one sonamed was an infant. This certainly had an influenceon England’s Financial Revolution when (from 1720)the government shifted totally from life- or long-term an-nuities (33 and 99 years) to perpetual annuities, ulti-mately forming the Consolidated Stock of the Nation(Consols), in 1752. In contrast, France’s public debt inthe eighteenth century continued to be heavily basedon rentes viageres, and surprisingly, a considerable pro-portion of Holland’s debt also remained in the form oflijfrenten.

Whatever form of rentes the urban or territorial gov-ernments chose to sell, its servicing costs were always farlower than the interest charges incurred in selling bondsor engaging in other forms of borrowing. Because of theusury laws, however, the historian finds it most difficultto collect valid information on interest rates. The largedifference in rates on Castilian asientos and juros has al-ready been noted. It is equally instructive to compareseventeenth-century French interest rates on loans withthe rates of returns on rentes. From 1631 to 1657, the an-nual average rate on loans and other forms of short-termborrowing was 25.88%. But by 1634, the rate of return onrentes had fallen from 8.33% (1/12) to just 5.56% (1/18).These exceptionally high French (and Castilan) interestrates reflect two very adverse factors encumbering theseloans, both of which required compensation to the lender:the frequent high risk of government default and the deepsocial opprobrium that the lender bore by engaging soopenly in usury. Conversely, the great advantage of ren-tes was not only their exemption from the usury





prohibition but also a lower risk of government default,although that risk was much higher in early-modernFrance than in Habsburg Spain, the Habsburg LowCountries, and Dutch Republic, and then England.

References

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